Jan 2006

Now is a good time to review your tax liabilities before the 2006 tax year kicks in on March 1. The ‘perks’ or not of company cars and car allowances for one …

In Finance Minister Trevor Manuel’s 2005 budget speech, there was an expectation that there would be a shift in car allowances back to company cars, albeit it a modified version of old-type company car schemes according to Bryon Corcoran, vice chairman of the leasing section 2005/2006.

This shift, anticipated in the main by allowance receivers utilising low business mileages, was based on the rationale that if one were to apply private travel accurately to the formula rather than the deemed private mileage, they would be penalised.

Also influencing this expectation was the reported practice by the South African Revenue Services (SARS) at that time of conducting random checks on odometer readings as well as questioning the receipt of travel allowances for jobs that did not appear to justify business travel.

In addition, there was much publicity in newspapers and trade journals surrounding the potential changes to the tax treatment of car allowances. At the same time, little was said about any changes to the taxation of company cars.

“What transpired is that Trevor Manuel increased the tax formula for both car allowances and company cars,” says Corcoran. “The latter was totally unexpected as we understood that SARS merely wanted to correct the misuse of the deemed private mileage formula for those people who miraculously travelled the optimum 32 000 kilometres per annum.” End result? The changes made were fair and equitable to both schemes with neither favoured.

“Despite the relatively equal treatment meted out to both schemes, these changes have not been good news for the motor industry as the net result is tantamount to a large interest rate increase,” he explains. “The knock-on effect of reducing disposable income is likely to reduce new car sales volumes as individuals tend towards delaying replacements.

“What’s more, because of the R360 000.00 cap applied to the allowance deduction table, there has been a trend towards ‘buying down’, particularly in the luxury vehicle sector. Any inflationary increases on car prices would simply exacerbate this trend.” For the vehicle finance and leasing industries, increases of this nature generally translate directly into increased bad debt as people find themselves unable to meet the increased debt.

“As most vehicle finance arrangements tend to range between 36 and 60 months, it is important for car allowance recipients to take into account the cost of the next phase of tax increases in the 2006/2007 tax year,” advises Corcoran.

From the tax payer’s point of view, an individual travelling a low business mileage should, in most instances, opt for a company car while a person doing a high business mileage would generally find a car allowance a more tax effective option.

The full blow of the Department of Finance’s travel allowance amendments will be felt in the 2007 year of assessment when deemed private mileage is upped from 16 000 km to 18 000 km.

Those individuals doing a mileage of less than 25 000 km a year are advised to maintain records or be at risk of chipping in.

In addition, the deemed fringe benefit on a company car will increase from 1.8% of the determined value to 2.5%.